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Exam 5: Gross Income and Exclusions

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Question 31

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U.S.citizens generally are subject to tax on all income whether it is generated in the United States or in foreign countries.

A) True
B) False

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Question 32

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Henry works part time on auto repairs and restoration projects.This year Henry was paid $5,400 for repairs he made to his neighbor's auto.Henry's neighbor promised to pay Henry another $2,200 in cash next year.Henry's brother borrowed $4,100 in cash in December of this year and gave him a negotiable promissory note for $4,300,due in three months with interest.Henry sold the note in January of next year for $3,500.Finally,Henry restored a car for the football coach.The coach paid him this year with a pass to next year's football games.The pass is worth $750.Compute Henry's gross income for this tax year,assuming that he uses the cash basis of accounting.

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$5,400 + $750 = $6,150 Gross i...

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Question 33

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A below-market loan (e.g.,from an employer to an employee)is a common example of a transaction that generates taxable imputed income.

J.Z.(single taxpayer)is retired and received $10,000 of Social Security benefits this year.How much of the $10,000 Social Security benefits are taxable if his only other income was $28,000 of pension income?

Aubrey and Justin file married filing separately.This year,Aubrey earned salary of $130,000,and Justin earned salary of $88,000.Aubrey and Justin live in a community property state.How much income earned will Justin report on his tax return for this year?

Ophra is a cash-basis taxpayer who is employed in the publishing industry.This year her employer informed her that because of her outstanding performance she is entitled to a free world cruise.Ophra asked her employer to issue the cruise tickets to her parents,and he complied with this request.Identify the principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets.

Sam,age 45,saved diligently for his college education by putting part of his pay into U.S.Series EE savings bonds.Sam purchased the bonds for $6,500,and this year he redeemed the bonds for $7,200.He has no other income this year.What amount must Sam include in his gross income?

Frank received the following benefits from his employer this year.What amount must Frank include in his gross income?

Jack and Jill are married.This year Jack earned $72,000,Jill earned $80,000,and they received $4,000 of interest income from a joint savings account.How much gross income would Jack report if he files married filing separately from Jill?

This year,Fred and Wilma,married filing jointly,sold their home (sales price $750,000; cost $200,000) .All closing costs were paid by the buyer.Fred and Wilma owned and lived in their home for 20 years.How much of the gain is included in gross income?

Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchair entrant.Ethan indicated that he would transfer the prize to the local hospital.How much of the prize should Ethan include in his gross income?

Ben received the following benefits from his employer this year.What amount must Ben include in his gross income?

Wherewithal to pay represents the principle that a realized transaction should require a taxpayer to sell other assets in order to pay income taxes.

Graham has accepted an offer to do graduate work in the chemistry department at State University.The chemistry department offered Graham a $5,000 tuition reduction and $3,500 toward the cost of room and meals.Under the terms of the scholarship Graham must work in the chemistry labs during the summer as a research assistant.What amount must Graham include in his gross income?

The cash method of accounting requires taxpayers to recognize income only when income is received as cash.

Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as he lives.Later this year Harold will recover the remainder of his cost of the annuity.Which of the following correctly describes how the annuity payments are taxed after Harold has recovered the cost of the annuity?

The receipt of prizes and awards is generally taxable.

Desai and Lucy divorced in 2018.Lucy has custody of their child,Andrea,and under the divorce decree Desai pays Lucy $120,000 per year.The payments must be made in cash and will cease if Lucy dies or remarries.The payments drop to $100,000 per year once Andrea reaches the age of 18.How much of the payments should Lucy include in gross income this year?

Identify the item below that helps determine which taxpayer must recognize earned income.

Identify the rule dictating that on sale of an asset a taxpayer need only include the incremental gain in gross income rather than the entire proceeds from the sale.